I have a margin account but E*Trade let me day trade for years without one. There were rules like you couldn't buy and sell the same stock in the same day but you also got hundreds of violations before they suspended this ability. So if you are more of a day-swing trader and not doing high volume it worked well enough for me.
The point is you are technically margin-trading when you do that. From the broker's perspective you are trading on margin until your prior trades settle.
As a onboarding hack I can see this as a great idea to help people get their first $100-$1000 on the market fast.
But the chance of an eventual margin call is almost certain in the long run (as has happened here).
It’s time to talk ethics in tech, this was a design decision to not unwind this once the user was embedded or otherwise clarify this upfront.
Margin call risk totally must be disclosed and is legally required (in Australia where I am) to be disclosed by any investment professional you paid to setup this sort of arrangement. I’d be fairly confident the same applies to US investment advisers.
It’s totally the sort of ‘feature’ that the user could have been advised of around say the 30 day mark. “We’ve set you up a margin account that’s valid for your first $1000, please now confirm if you’d like to continue to carry a margin call risk otherwise were converting you to a standard account.”
It’s also super common for margin facilities to allow investors carrying the risk, 24-48 hours to contribute to retain the position, auto-selling out is a last resort.
It’s not just on-boarding. People expect to make a transfer from their bank account and have insta-credit to their RH tradable cash balance. This is a core feature of their app.
It's time the US got instant wire transfers. Most of the rest of the world has it. Being able to wire money to a friend and 5 seconds later their phone goes 'ding' and they can spend that money is really a requirement of basic functional banking.
The system you mention is the same. Clearing is done at the end of the day.
All that is exchanged during the day are IOUs (debt) and if one player in the chain goes bankrupt during the day the central bank might cover its debt up to some limit.
We haven't had any major crisis since those instant pay apps were put into place. So those aren't really battle tested systems and I guess we'll only effectively discover how resilient they are during the next crisis...
For those trying to follow along. Margin lending occurs when part of the funds put on the market are funded by a debt mechanism.
Classically I might invest say $10,000 and the debt facilitate would say provide a $10,000 loan and I’d have $20,000 invested in the market in my name, with a 50% loan to value ratio.
If the investment dropped far enough.. say to $12,000, the margin call facility works like this.
It considers the remaining money is always the lenders, so now the lender is exposed for $10,000/$12,000 eg 83% of the exposure is theirs.
They then ask you to top back up your contribution so they are less exposed (within 24-48hrs), or they auto-sell stock to ensure they are not exposed further.
In the case of Robinhood, the margin lending arrangement is always fully backed once the cash is processed. Which I’m guessing is always reliably a few days after it’s deposited.
So it’s crazy to trigger margin calls as all the debt is quickly fully backed.
It would be expected that Robinhood would have negotiated an instrument that never left them with margin calls on cash contributions like this. This is totally on them.
This is not specific to margin accounts and is not what is meant by margin. Cash account with any broker (that I know of) would also give you the same feature -- that is you have access to the cash for trading before the transfer is complete.
If they are letting you trade with instant credit, then under the hood there ARE margin loans going on. To be compliant with SEC regulations the broker must be pulling on short term margin loans from a bank to cover the securities being bought without hard cash in hand.
No they are exposed to you as a credit risk. They trust you that you intend to transfer the money in good faith. As long as the transfer is complete at no point they make a loan to you because trade settles at T+2, i.e. cash is not required on the date of trade. It is the loaning aspect that is regulated. Free riding is forbidden by Reg-T of the FRB. Your broker's settlement risk is not considered a margin loan either. It is a credit risk that they satisfy by depositing funds with the DTCC for a tiny fraction of the notional value.
The difference between the credit risk and the margin loan is that in the vast majority (say > 99%) of times the credit risk does not become a loan. You don't need to punish all the people acting in good faith for the action of a few. The regulation on free riding comes from a money supply perspective. You are not allowed to create money without taking out a loan.
In Canada I use WealthSimple and they don’t even have margin accounts. In the past I’ve been pissed about the 3 day hold period of funds coming in but I totally get it now.
I'm waiting for when their cash account allows direct deposit and then they support instant transfer from Wealthsimple cash account into Wealthsimple trade.
Don't believe so. I got hellbanned for selling, buying something new, and selling that all in one day. Hey, I'm easily confused. You can sell and immediately buy with the proceeds but cannot sell the newly purchased shares until the original trades settle.
Fortunately they make it easy to create new accounts and transfer from one to another. Now my banned account is empty and I'm more careful.
Yikes i'm sorry. They definitely give a few chances I also don't really understand. I now always try to have extra cash inside the actual investment account. Maybe you can try to change the sell order (first in first out -> sell the oldest share first)
There's various brokerages that don't give registered users margin accounts by default and it's something that users specifically have to ask for (similar to asking for options trading).
Which ones? I thought being able to buy securities immediately after initiating a transfer before that transfer settles was industry standard? I know (at least) Fidelity and Vanguard let you do so with just a normal run-of-the-mill brokerage account.
My husband once accidentally messed up his transfer to Vanguard and it didn't go thru and he already purchased mutual funds with that money he meant to transfer. It told him he had a trading violation and the lady on the phone said having just a single trading violation didn't matter.
Hmmm... my Vanguard account doesn't work that way. If I initiate a buy using external funds (from my bank), the actual purchase doesn't happen until the funds clear in ~2 days. It will just show "pending".
The general info you cite is great, but I'm disappointed in the Zacks stuff.
The US moved to what's called T+2 settlement (trade + 2 days) in 2017, over 2 years ago. Zacks still talks about T+3. In contrast, your Fidelity link gets it right.
Someone might say "so what!", but Zacks purports to be a financial advice website. They should know better. It makes me question the accuracy of the rest of their website.
For example, imagine that on Monday you have nothing in your brokerage account except shares of a specific stock, which you sell that morning for $10,000. The trade will settle on Thursday.
It's further down the (infinite-scrolling) page, under the title "Why Wait Three Days to Sell Stock?". Looks like much of the material there is older, but this section at least has been updated to mention the change to T+2.
No you really can't because of what is known as free riding.
Consider a scenario where you have a cash account with say 100 dollars and you buy 1 share of stock X for 100 dollars. That's it, you can no longer trade for two days. Because trades take two days to complete, if you have a cash account you need to wait that full two days before you technically own the shares and can sell it. Until that two day elapses, your account has 0 dollars in it.
Now if you have 100 dollars in your account and you buy stock A for 30 dollars, then your account will have 70 dollars left that you can use to trade with, but this is an incredibly inefficient and impractical way of trading.
Perhaps I don't understand it, but I think parent poster gave bad example of what s/he tried to say.
My understanding is that if you had $100 and you purchased stock for $100 and it went up in few hours to $120 and you decided to sell it, so you can purchase something else. You can't you have to wait 2 days.
Of course if you have enough money you will have buffer to account for that, but it makes it harder to do day trading when everything is delayed by 2 days.
The "you can't part" here is what's not clear. My understanding of non-margin trading is that you would be able to sell for $120. What you would not be able to do is then purchase something else with that $120 until T+2 when it settles and the money is in your account again. You technically don't have that $120 until the settlement.
Wikipedia, and almost any remotely reputable source, defines day trading as when a trader "buys and sells a financial instrument within the same trading day, such that all positions are closed before the market closes..."
If you can't sell the stock that you bought on the same day that you bought it, then by definition you can not day trade.
> If you can't sell the stock that you bought on the same day that you bought it, then by definition you can not day trade.
Deposit $1000, wait 3 days, buy and sell $100 of the same stock in the same day. You still have $900 to trade with.
It may be “less efficient”, but it also reduces your risk, and risk management is fundamentally what successful trading is about.
Some people don’t want to depend on the bank for margin or leverage, and are happy to trade with cash only. Increased efficiency brings increased risk and decreased ability to deal with short term shocks.
There are certain options you can't trade without a margin account because they are fundamentally on margin no matter what.
Whether or not you can "day trade" on a cash account would probably just be equivocating about what "day trading" is.
It definitely does limit your ability to very quickly enter/exit positions.
You can, its called a cash account. IMO this is better than a margin account, especially for <20k$. Below this threshold margin accounts are usually treated nearly identical to cash accounts.. except you can _buy_ when you shouldn't be able to... and then have to hold that security for 1-3days for the funds to clear.
In a cash account when you sell, the funds must settle for 2-3days... meaning you can't use those funds for purchases.
It keeps people who are cash short out of the market, rather than in... that's the main difference for small accounts.
https://finance.zacks.com/tax-rules-use-proceeds-stock-sales...
https://www.fidelity.com/learning-center/trading-investing/t...
My understanding is that you couldn't do day trading without a margin account.